Brexit and the Law: The Practical Effects on Litigation

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Brexit continues to generate political dramas and dominate the news agenda in the UK – a phenomenon likely to continue for the next two years and probably beyond. The resignation of the UK’s ambassador to the EU, Sir Ivan Rogers – apparently because of his views on the complexity and likely timescale of negotiating Brexit – is just one example of recent controversy. But amidst all the noise, lawyers are trying to understand the real impacts that Brexit is going to have on the legal landscape, and in particular, what changes it will bring on both domestic and cross-border litigation. Here, Christian Tuddenham and Kelly Hagedorn, both Partner at Jenner & Block London, explain to Lawyer Monthly what those changes may look like.

The one certainty

A substantial body of UK legislation derives from EU law. At present, it is almost entirely unclear what long-term effects Brexit will have on this body of law. Other than the Great Repeal Bill, which will copy across all EU law into domestic UK law for a smooth transition on the day after Brexit, the government has yet to set out its plans regarding any specifics, other than that they intend to “amend, repeal and improve” individual laws as necessary. As with everything Brexit, all that is really certain is that there is uncertainty.

There are all sorts of reasons why uncertainty about Brexit is no good for business, but from a risk management perspective an obvious concern is the impact on businesses’ ability to anticipate, manage and resolve legal issues and disputes efficiently. So for example, there are numerous questions about what Brexit might do to existing contractual relationships: for instance, could agreements relating to the provision of goods or services into or out of the EU be vulnerable to termination on the basis of frustration, or pursuant to force majeure or material adverse change (MAC) clauses? Another area of uncertainty concerns the impact on English jurisdiction clauses, and whether these will operate as intended, post-Brexit. There are also important questions regarding businesses’ abilities to enforce English judgments within the EU after the UK leaves. We look at these questions below.

Contractual relationships

The narrow application of the doctrine of frustration means that there will be limited circumstances in which it might apply post-Brexit to permit the discharge of a contract. It will be necessary to show that the contract has become impossible or illegal to perform, or that the obligations in question have fundamentally altered such that the contract is not only more onerous, but radically different from the original agreement. Increased costs or lower profits attributable to Brexit, for instance, will not constitute frustration.

There may be greater scope to terminate a contract pursuant to force majeure or MAC clauses. Each case will depend on the terms of the clause and the particular facts. Changes in economic circumstances will generally be outside the scope of force majeure, but some clauses do include government or regulatory action as potential force majeure. The ability to rely on a MAC clause in the context of an acquisition will in part depend upon whether the asserted MAC is an “external” event (for example, a change in interest or exchange rates) or an “internal” event specific to the transaction (for example, a change in the target’s credit rating or the loss of its passporting rights). It is generally only the latter types of event that will allow MAC clauses to operate.

English jurisdiction clauses

Regulation (EU) No 1215/2012 of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‘Recast Regulation’) currently ensures that jurisdiction agreements contained in contracts are respected by all EU Member States. This provides certainty and expediency, which is obviously desirable when considering where and how to resolve commercial disputes.

What will happen post-Brexit? Although it is possible that the UK might contract into some form of treaty arrangement with the remaining EU Member States that mimics the terms of the Recast Regulation, negotiating something of that nature is unlikely to be a priority for either the UK Government or the European Commission.

What are the other options? The UK could seek to accede to the 2007 Lugano Convention, which – like the Recast Regulation – is designed to promote recognition of jurisdiction clauses within (and outside) the EU. Alternatively, the predecessor to the Recast Regulation, the Brussels I Regulation (EC) No 44/2001, might apply. However, both the Lugano Convention and Brussels Regulation differ from the Recast Regulation in the important respect that they do not require EU Member State Courts to stay proceedings that are commenced in apparent breach of a jurisdiction clause. The loss of this protection would therefore allow litigants to delay and complicate legitimate claims via the commencement of parallel proceedings. In this scenario, it will be all the more important for Claimants seeking to rely on an English jurisdiction clause to commence proceedings without delay, and thereby pre-empt any attempt by one’s opponent to obstruct the claim.

A different route would be for the UK to ratify the 2005 Hague Convention on Choice of Law Agreements (which applies to all EU Member States except Denmark), but this Convention only requires recognition of exclusive jurisdiction clauses.

If nothing is done, then the Courts of individual EU Member States will be free to apply their domestic law. Whilst it seems likely that the Courts of many EU Member States would generally continue to recognise English jurisdiction clauses, in the absence of a unifying instrument the approaches taken by different EU Member States would almost inevitably be different and quite probably inconsistent. That said, there is an incentive for the EU Member States to be practical. Any marked change in the approach taken by EU Member State Courts towards appropriate recognition of English jurisdiction is likely to provoke a move away from Europe altogether, towards New York, Singapore or Hong Kong.

Given the uncertainty, there may be some benefit in considering whether providing for an alternative EU Member State to have jurisdiction might be beneficial.  This would ensure that the choice of jurisdiction will be respected, and should prevent counterparties attempting to exploit the uncertainty and seek to avoid a jurisdiction clause by launching proceedings in another country.

Enforcement in the EU

Currently, English judgments are enforceable in all EU Member States pursuant to the Recast Regulation. As explained above, there is a range of alternatives to the Recast Regulation post-Brexit. The best outcome would be the maintenance of the status quo via the negotiation of a treaty or instrument of equivalent effect to the Recast Regulation, but this would take time and resources. A more likely scenario is the application of either the Lugano or Hague Conventions. However, enforcement under either Convention would include a requirement to obtain a declaration of enforceability from the enforcing Court; the Recast Regulation abolished the need for this step. A further disadvantage is the Hague Convention’s limited application only to agreements that contain exclusive jurisdiction clauses. The Hague Convention also permits a Court to refuse to enforce a judgment for a broader range of reasons than is the case under the Recast Regulation.

An alternative would be for the UK to enter into bilateral arrangements with EU Member States under the Administration of Justice Act 1920 or the Foreign Judgments (Reciprocal Enforcement) Act 1933. Absent that, the default position will be that enforcement of English judgments will be left to the domestic law of individual EU Member States. Whilst the general expectation is that EU Member States would adopt a pragmatic and sensible approach to enforcement (if only in the interest of maintaining reciprocity), navigation of 27 different domestic laws and procedures would mean uncertainty, greater complexity and increased cost.

Pending clarity on the post-Brexit EU enforcement regime, businesses and their legal advisors should consider arbitration (and the inclusion of arbitration clauses) as an alternative to litigation. The 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which governs the enforcement of arbitral awards worldwide, has been ratified by all EU Member States and will be unaffected by the UK’s departure from the EU.

Concluding thoughts

The inherent uncertainty makes any attempt at definitive advice on how to manage the implications of Brexit on dispute resolution impossible and unwise. However, the importance of thinking ahead (where the situation allows) cannot be overstated. Is your contract vulnerable to being challenged under a MAC or force majeure clause? Where and with whom might you be doing business (and therefore possibly in dispute) in two years’ time? Where might you need to enforce any judgment? What use does your organisation currently make of arbitration (and indeed other alternative dispute resolution mechanisms)? Those who take the time now to consider these sorts of questions are more likely to be those who experience the best outcomes in these turbulent times.

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